Understanding Section 55 and Butterfly Reorganizations, 4th Edition

This book is intended to provide an understanding of butterfly reorganizations and other aspects of section 55 of the Income Tax Act and to serve as a useful tool for tax advisers practising in the area. Since the 3rd edition was published in 2010, many legislative, judicial, and interpretive developments have created the need for a fourth edition. 

• Of special importance are the legislative amendments to section 55 that broadened the scope of the rules.
  • The amendments introduced new “purpose” tests, narrowed the scope of the related party exception in paragraph 55(3)(a), modified the safe income exception and introduced new rules for stock dividends.
  • The amendments were, in large part, in response to a court case.
• An additional legislative amendment was enacted relating to the reorganization of qualified small business corporations and family farm and fishing corporations.
• Developments in case law on “series of transactions”.
• The CRA has released numerous statements on the amended legislation, the calculation and allocation of safe income and on other section 55 issues including rulings on cross-border butterflies. 

In addition to these and other developments, this book provides a comprehensive analysis of section 55 and related provisions. We hope that Understanding Section 55 and Butterfly Reorganizations will prove to be a valuable resource to all income tax practitioners, from those who are novices to the intricacies of section 55, to experienced professionals. This book addresses the state of the law and related material as of August 1st, 2024.

The most notable changes in the 4th Edition include:

Chapter 1: Subsection 55(2)
Chapter 1 has been revised and updated to include discussion on:

• The court case that prompted the amendments
• The amended legislation and the new purpose tests with examples
• CRA’s views on the purpose tests including the potential application of subsection 55(2) to common transactions
  updated discussion on “series of transactions” for court decisions since the 3rd Edition
• CRA’s administrative position – which is based on a court case - on the application of subsection 55(2) where a dividend initially met the Part IV tax exception

Chapter 2: Safe Income
As a result of the amendments, the safe income exception has heightened importance for dividends paid within a corporate group.
Chapter 2 has been revised and expanded to include discussion on:

• A survey of case law along with CRA’s historical positions that created the framework for the safe income exception
• The amended legislation for the safe income exception with examples
• CRA’s administrative positions on the amended safe income exception and safe-income determination time
• CRA’s updated positions on safe income consolidation within a corporate group
• CRA’s updated position on accessing safe income after a tax-deferred transfer of certain types of property
• CRA’s new positions on the allocation of safe income and cost base on a corporate reorganization
• CRA’s new position on safe income vs. safe income on hand
• CRA’s “global approach” to allocating safe income
• The amended rules for stock dividends

Chapter 3: Paragraph 55(3)(a) Exemption
Chapter 3 has been revised and updated to include discussion on:

• The amended legislation for the paragraph 55(3)(a) exemption with examples
• CRA’s positions on the application of GAAR to certain forms of paragraph 55(3)(a) reorganizations
• CRA rulings on post-acquisition reorganizations
• CRA rulings on paragraph 55(3)(a) spinoffs under a new holding corporation with unrelated shareholders
• A legislative amendment to facilitate family reorganizations of qualified small business corporations and family farm and fishing corporations

Chapter 9: Cross-Border Butterflies
Chapter 9 is a new chapter on cross-border butterflies:

• The CRA has issued several rulings on cross-border butterflies which were thought to be extinct
• This chapter discusses, with examples, various forms of the cross-border butterfly and the technical issues encountered

Other Chapters
Other chapters have been updated for relevant CRA rulings and interpretations since the 3rd Edition.